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Donor-Advised Funds Considerations to Help Accomplish Your Philanthropic Goals
Published Date : October 30, 2023
A donor-advised fund (DAF) is a charitable giving vehicle administered by a public charity that allows a donor to contribute, receive an immediate tax deduction, and recommend grants to charitable 501(c)3 organizations from the fund over time. There are several considerations when using a DAF that will help you make the most of their benefits. Here are some key considerations:
Charitable Goals – Begin by clarifying your charitable goals and intentions and making a list of the organizations you would like to support. Articulating goals helps clarify your purpose and therefore helps guide your decisions.
Contributions – Determining the amount to contribute to your DAF often follows input from your Wealth Manager (what can you afford to give) and your tax professional (expected tax benefit). Additionally, your Wealth Manager can help you find the optimal asset(s) to fund your DAF. DAFs are often great vehicles to accept highly appreciated private or public stock.
Tax Deduction – Understand that contributions to the DAF are generally tax deductible in the year they are made but grants from the fund receive no tax benefit. Coordinate with your tax professional to maximize deductions as it often is best to bundle several years’ worth of contributions into one tax year for maximum benefit.
Investment Strategy – DAF contributions can be invested, growing the donation base for future grants. Your Wealth Manager can help you determine the appropriate strategy to balance both your goals and risk tolerance.
Grant Recommendations – DAFs allow you to recommend grants to qualified charitable organizations. It is important to make sure the organizations you plan to support meet the requirements for charitable contributions, which is a public, 501(c)3 non-profit organization recognized and currently in good standing with the IRS.
Grant Making Flexibility – It is important to know the DAF’s sponsoring organization’s policy on grantmaking. Some organizations may have minimum grant amounts, minimum number of gifts per year, restrictions on certain grants (such as grants to international organizations), or other specific guidelines for grantmaking.
Timing of Grants – Decide when and how often you plan to make charitable grants. Some charitable organizations prefer annual grants and others prefer various times throughout the year. As a reminder, the grant donation from the DAF does not generate a tax deduction, only the contribution into the DAF does, so there is no incentive to make a grant at any particular time for tax reasons.
Privacy Vs. Transparency – Part of the donation planning should be to determine whether you prefer the DAF organization to send your donations anonymously or allow them to disclose your information to the recipient. One nice feature of DAFs is the ability to choose a name for your fund which can shield your identity versus simply using the generic “anonymous”.
Long-Term Strategy – Much like the contribution’s consideration (#2) above, ensuring a long-term plan is sustainable by allowing your Wealth Manager to test your gift planning scenario(s) with cash flow projection software. A cash flow check-in will help the donor find the optimal gifting amounts that both accomplishes the philanthropic goal without jeopardizing the donor’s own needs.
Succession Planning – The DAF will allow you to determine what happens to the fund after you pass, which can vary from leaving the account to a new donor for continued grantmaking to dispersing the funds to one or more final
recipient(s).
A donor-advised fund can be an effective and efficient vehicle to help ensure your financial and philanthropic objectives align. As with all endeavors that require financial, legal, and tax planning, it is recommended that you consult with your Wealth Manager to discuss your goals and develop a plan that can then be coordinated with the appropriate professionals on your team.
Sources: Fidelity Charitable, Schwab Charitable, National Philanthropic Trust, IRS.gov
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